since March 2008 the Canadian Federal Government has been
progressively releasing further details of the proposed
scheme.

In 2006, Canada s GHG emissions amounted to 721 megatonnes
of carbon dioxide equivalent (Mt CO2-e), which is 22 per
cent over 1990 emission levels and 29 per cent above its Kyoto
target. Although this represents a significant increase over the
past 16 years, Canada has recently been experiencing a
declining trend since 2003; 2006 emissions are 2.8 per cent
below 2003 levels. Canada s economic GHG intensity the amount of
GHGs emitted per unit of economic activity was 11 per cent
lower in 2006 than in 2003.

Several Canadian provinces are participating in conventional
emissions trading schemes set up by various regional groupings in
North America. Further, Alberta has implemented its own emissions
intensity-based trading scheme. If and how these various regionally
based emissions trading schemes link with the proposed Canadian
scheme (let alone any Federal United States (US) emissions trading
scheme) is not yet clear.

The Scheme
The proposed Canadian emissions trading scheme is a
baseline-and-credit system. The government proposes intensity-based
targets that will come into force in 2010, which may lead to
absolute reductions in emissions of greenhouse gases from industry
by 2020, based on 2007 growth forecasts (see below on emissions
intensity). Brief details of the proposed scheme follow.

The Canadian government is seeking to reduce the countries total
GHG emissions by 20 per cent relative to 2006 levels by 2020.
Canada has a further target of reducing such emissions by between
50 to 60 per cent, relative to 2006 levels, by 2050.
It is important to note that these are targets, not absolute limits
on GHG emissions.

Coverage
The following industries would be formally included in the proposed
scheme:

Not all emitting facilities in these sectors would be subject to
the proposed scheme. The following table illustrates thresholds for
five particular sectors that a facility in that sector has to
exceed before it is subject to the proposed scheme:

An 18 per cent reduction in emissions
intensity (see below) over 2006 levels by 2010 and a further
2 per cent a year reduction in following years.

By 2015 a 26 per cent reduction in
emissions intensity, and 33 per cent reduction by 2020 would
be required.

New facilities, commencing operation after 2004, would have a
three year commissioning period applied to them before being
required to improve their emissions intensity. After the third year
new facilities would be required to improve their emissions
intensity by 2 per cent per annum

a specific clean fuel standard applies to these new facilities.
That is, a new facility will have their targets calculate as if
they were using the 'cleanest' available fuel.

For existing and new facilities, fixed process emissions, which
are emissions tied to the production and for which there are no
alternative reduction technology, would receive a 0 per cent
target. This approach would apply to facilities where there was no
way of reducing emissions save shutting down production.

The same 18 per cent initial target applies both to
corporate entities and a sector as a whole.

The specific firm targets form the basis for the specific
obligations under the proposed scheme. If a firm's emissions
intensity breached its target it would be obligated to either
purchase additional emissions credits/offsets from various sources
or make contributions at the specified rate to the proposed
Canadian Technology Fund (see below on compliance for further
details).

It is also important to note that there are no absolute upper
limits for GHG emissions. Rather, the scheme depends on increasing
the cost of such emissions over a reducing baseline over time.

Emissions trading
Where a facility improved its emissions intensity by more than the
required annual amount it would be issued with emissions credits,
equal to the difference between their target and the actual
emissions intensity for that year achieved. Such facilities could
trade these credits with other participants in the scheme or save
them for future use.

Emissions intensity
The use of an emissions intensity approach is relatively uncommon.
In the Netherlands, long-term agreements on energy efficiency,
which have been made with industry and other sectors since 1992,
are expressed in energy consumption per physical unit of product.
In the UK, France and Germany, voluntary agreements on
CO2 include more relative than absolute
targets. Argentina also has a voluntary emissions control regime
based in emissions intensity measures.

In the US, in February 2003, the Bush administration announced a
series of voluntary global warming agreements with the industry,
most of which are expressed in greenhouse gas intensity (electric
utilities, wood/paper industry, chemical industry, and cement
industry) or energy intensity (oil and gas industry, iron and steel
industry, railroad). It does not seem likely that the US will now
follow up on this proposal.

Canada's approach
The key concept in the proposed scheme is that of emissions
intensity. This refers to a facilities output of the six GHG gases
mentioned in Annex 1 to the Kyoto Protocol, measured in terms
of CO2-e per unit of economic output or
activity. At this point the exact unit of economic output has not
been precisely defined.

The emissions intensity approach can be seen as an interim
measure. During the period 2020 2025 the Canadian Government
intends to move to a fixed cap and trade approach. The stated
reason is to take account of the emissions trading scheme
developing elsewhere in North America.

Compliance
Apart from the purchase of surplus emissions credits scheme
participants can satisfy the obligations under the proposed scheme
in a number of ways, as follows:

Purchase of emissions credits generated by the Kyoto Protocol s
Clean Development Mechanism. However scheme participants can only
satisfy 10 per cent of their annual obligations in this
way.

Participants that took acceptable 'early action' measures may
use the resulting credits to satisfy their obligations. Emissions
credits from this source may also be saved for later use, or sold
to other scheme participants.

Make contributions to a Technology Fund at the proposed rate of
C$15 per tonne/CO2-e. This compliance
mechanism will be available only for a limited number of years. A
scheme participant may initially satisfy up to 70 per cent of
their annual obligations in this way. However, this percentage
falls sharply during the initial years of the scheme to 0 per
cent by 2018.

Emissions credits may be generated by direct investment in
large scale emissions reductions projects such as carbon capture
and storage projects.

Other policies
The proposed Canadian emissions trading scheme will not operate in
a vacuum. The Federal government has proposed additional measures
be adopted that will complement the operation of the scheme.
Amongst these measures are:

The mandatory use of carbon capture and storage technology for
new facilities in oil sands and power generation sectors and the
encouragement of retrofitting this technology where
appropriate.

The establishment of a Technology Fund to invest in qualifying
GHG emissions reduction projects.

Development of cleaner power sources, mainly through additional
hydroelectric and nuclear power stations and the advanced
retirement of coal fired power stations.

The Federal GHG Emissions Offsets scheme, where sectors not
formally covered by the proposed emissions trading scheme may
undertake projects that remove or reduce GHG emissions and generate
emissions credits. These credits are later sold to scheme
participants. The generated credits must meet a number of criteria
to be accepted.

For example, the waste sector is a notable exemption for the
proposed emissions trading scheme. Firms or facilities in this
sector may undertake projects for the collection of methane from
waste dumps and use it to generate electricity. Projects of this
type would generate an emissions credit under the Offsets Scheme
that could later be sold to scheme participants.

Assessment—Emissions
Intensity Approach
The major feature of the proposed Canadian scheme is its use of
emissions intensity per unit of economic output as the chief
measure for controlling GHG emissions. There are some apparent
advantages in this approach:

Theoretically, an emissions intensity based regime, based on
emissions intensity per unit of Gross Domestic Product (GDP), may
reduce the overall economic costs of an emissions trading
scheme.

One of the arguments put forth in favour of relative caps is
based on the uncertainty on business-as-usual output—if the
firm's production level is higher than expected, so will be
business-as-usual emissions, hence reaching a given level of
emissions will be more costly than expected. As a consequence, it
is argued, a higher emission level should be allowed if the
production level is greater than expected.

An intensity based target is more flexible, thus can
accommodate a wider range of participants in any global
agreement.

A well designed general intensity approach may reduce the
uncertainty in the outcome of emissions reductions efforts, but
only where future GDP is relatively certain.

However, an emissions intensity approach may have some
disadvantages:

A 2005 mathematical simulation of this approach suggested that
it was more suited to developing countries than developed ones like
Canada.

A scheme based on the emissions intensity approach may be
difficult to integrate with other emissions trading schemes based
on a set upper annual GHG emissions limit, such as the EU Emissions
Trading Schemes and the regional North American emissions trading
schemes.

Emissions intensity based schemes are more complex to
administer than the already complex cap and trade schemes based on
a set limit of GHG emissions.

They are far more complex to design than conventional cap and
trade schemes. The margin for error in their design is greater than
for a conventional cap and trade scheme.

Well-designed emissions intensity based schemes may not produce
a very different result to that of a conventional cap and trade
based scheme. One study found that effective emissions intensity
schemes had to be coupled with a very restrictive emissions target.
In these circumstances, the policy design was close to that of a
conventional cap and trade scheme.

Another study suggested that a cap and trade based scheme would
produce a better result, in terms of the overall cost of emissions
regulation, than an emissions intensity based scheme.

They are less transparent, in that it is less clear that each
emitter has actually reduced their emissions.

The is some uncertainty over whether emissions will actually
reduce if economic growth and output is strong.

It is a well and often made point that the control and reduction
of GHG emissions requires widespread international cooperation. To
date the conventional cap and trade approach has been more widely
adopted for this task.

It is interesting to note that Canada regards the emissions
intensity approach as a stopgap measures on its way to adopting a
conventional cap and trade style scheme. Thus the strong concerns
expressed by domestic Canadian groups over the adoption of the
emissions intensity approach may be overdrawn.

It may be argued that the emissions intensity approach may be a
better basis for rapidly developing countries such as China and
India to adopt in order to include them in an international
emissions trading scheme. In view of the relatively more complex
design and administration tasks involved with this approach, and
the suspected limited administrative capacity of these countries,
implementing an emissions intensity based approach in these
countries may not be effective in controlling their GHG
emissions.

Assessment—Other
Matters
There are a number of other concerns raised by the proposed
Canadian emissions trading scheme, such as:

To date there have been few successful baseline and credit
emissions trading schemes. Their major weakness is that the
economic incentives are to create additional credits, rather than
reduce emissions. If the emissions credits or offsets are
ineffective such schemes end up increasing emissions rather than
reducing them.

Ensuring that the emission offsets/credits are effective is a
substantial administrative burden of the proposed scheme.

The price of emissions credits/offsets under a baseline and
credit systems potentially have a higher volatility than emissions
permits and offsets under a conventional cap and trade scheme.

The option for a participant to meet their obligations in the
first few years by contribution to the Technology Fund, at a rate
of C$15 per tonne/CO2-e does provides a very weak incentive to
invest in emissions control equipment at the firm level. Only when
this option is restricted in later years will the incentive for
participants to control their own GHG emissions be high enough to
stimulate any investment by a firm in additional emission control
technology. It is likely that any useful impact on Canada's GHG
emissions will be delayed.

The option to contribute to the Technology Fund may also
restrict the market for offsets/credits. It is likely that scheme
participants will prefer to contribute to this Fund, rather than
purchase offsets/credits. The liquidity and development of the
offset/credit scheme is thus potentially restricted by the
operation of the proposed Technology Fund. This may lead to a very
low price for those offset/credits that are created, again leading
to weak incentives to actually reduce emissions.

If in turn this also leads to a less than desirable number of
offsets/credits being offered for sale the development of hedging
instruments, such a forward contracts, will be restricted or not
occur. This will further restrict the overdevelopment of an
emissions trading market in Canada.

Linkage
In the Canadian Speech from the Throne of November 2008 the
Canadian Governor-General stated that:

We will work with the provincial governments and our partners to
develop and implement a North America-wide cap and trade system for
greenhouse gases and an effective international protocol for the
post-2012 period.

It is important to note that section 2502 of the current US
Climate Security Act requires that US firms only purchase emissions
allowances (not offsets/credits) from foreign emissions trading
systems that impose mandatory absolute tonnage limits on GHG
emissions. This is exactly what the proposed Canadian emissions
trading scheme does not do. Thus the Canadian scheme may have to be
substantially modified to have any meaningful linkage with any US
national emissions trading scheme.